Revealed - the best performing PRS assets and how to find them

The whole world is currently dealing with the challenge of Covid-19. Huge government support is being promised on a scale even greater than at the time of the 2008 global financial crisis, and the hope certainly is that such concerted action will help protect incomes and livelihoods.

Indeed, with specific regards to property, the banks are promising mortgage holidays and the UK government has rushed through emergency legislation to prevent evictions. There are also plans for the state subsidy of wages in a push to ensure people do not end out of a job and out of a home.

It is of course too early to say just what the exact impact of the pandemic will be on each sector of each nation’s economy. But what I believe each sector can do is look at the underlying trends in order to try and predict how various markets and assets might fare once the emergency is over.

That is what I intend to do here, looking specifically at the private rented sector (PRS).

Strong foundations

The first thing to say is that the PRS was certainly predicted to grow before the pandemic started (and should still grow once it is over).

In fact, investment in PRS was set to soar to £7 billion by 2025, with and an estimated additional 560,000 households in private rented accommodation by 2023.

And whilst not trying to downplay Covid-19, the fact remains that it is notoriously difficult for first-time buyers to access the property ladder. This hurdle has, in significant part, contributed to the growth of the PRS and, indeed, to a rise in the age of the average renter, with 35-49 year olds overtaking young professionals as the most prevalent group in the sector.

Nonetheless, a variety of factors have resulted in the growing attractiveness of PRS for tenants.  A lack of mortgage deposit is the primary reason for renting for 71% of young families, but it motivates far fewer people aged 25 and under (just 41%).

For 30% of this group, their primary motivation for renting was a desire for flexibility and not wanting to be tied to one location. Those over 50 are also the most likely to be motivated by not wanting the responsibility of owning a home, according to Knight Frank’s tenant survey.

So there is a clear and growing demand for rental products in the UK, making property an ever more viable asset for investors. However, there is often a significant emphasis on new Build to Rent properties, which although helpful in the context of the housing crisis, runs the risk of neglecting the potential returns of existing housing stock as an investment choice.

Indeed, Knight Frank have predicted 560,000 new households in the private rental sector by 2023,  but with only 110,000 Build to Rent properties currently in the pipeline, they simply cannot meet the expanding demand from PRS tenants – and as a result, it is essential to start utilising existing housing stock.

The potential of existing housing stock

As technology takes a more prominent role in determining how we make investments, it has increased the level of competition across a range of markets by improving investors’ ability to identify potential targets, pinpoint criteria, increase yield possibilities and deliver greater financial efficiency.

A notable innovation has been the use of Artificial Intelligence (AI)-enabled systems to identify trends. This is something we use to track millions of data points and identify the best performing potential assets on the basis of a number of factors.

Indeed, technology is widening the pool of data available to investors, making it far more viable to define the potential of an asset by pin-pointing a high yield criteria, and then identifying trends in the market at a hyper-localised level.

This includes factors such as potential price appreciation and traffic information, all of which are sparsely available through more traditional search methods, but which can feed into identifying the best-placed investments across the sector.

Pinpointing hyper-localised potential

‘Location, location, location’ is of course such an important factor in property investment. At the moment, investment in London’s PRS sector far outweighs that into the PRS across the rest of the UK. But over the next five years this is set to change.

That’s because the clear direction of travel by the UK government is to ‘level up’ the rest of the country, not least through investment in schemes such as HS2 and the Northern Powerhouse and Midlands Engine agendas.

Birmingham, Manchester, Leeds (and also Cardiff and Edinburgh, where regional development policies have been in effect for some time) are strong examples of the growing PRS market outside of London, where the potential for stronger performing investments is increasing.

Indeed, at Skwire we have spread our own investments across a number of UK cities, focusing on the potential of an asset at a hyper-localised level, rather than being consumed by the PRS market’s overarching (and less nuanced) trends towards new build properties and investment in London.

And this is also where AI technology can take this further, with new systems helping to match investors to ideal assets more quickly and better refining searches in order to identify hyper-local high demand areas, which in turn increases the profitability of investments.

So rather than simply generalising about the possibilities of investments in the above cities – all of which are expected to support fruitful PRS activity in coming years – AI can pinpoint high potential areas far more precisely.

Indeed, yield is closely linked to a number of factors on a highly localised level. Purchase price is rightly a major consideration in determining asset yield, but so is proximity to amenities which tenants value, such as good schools, leisure and strong transport links. To identify these manually can be both laborious and time-consuming.

Improving tenant services enhances the potential of investment

Ultimately, rental properties make clear sense as a secure and robust investment for passive and capital growth. And with data-focused solutions identifying the best potential investment opportunities, investments in existing stock can be made at scale.

This creates better products out of existing stock and contributes to the overall improvement of a robust and secure rental market for both investors and tenants, which in itself can further enhance potential returns.

But a key trend that we expect to see continue in the rental market is the improvement of tenant services. Specifically, increased flexibility and more responsive, technology-based solutions that improve the renting experience and encourage people to stay in the market longer-term.

Achieving this through existing properties will in turn help to cut down on void spaces, paving the way for greater returns on an already well-judged investment.

As the number of people renting in the UK grows, PRS investors are increasingly finding themselves at the centre of the housing market and, indeed, of housing solutions, with 25% of the population expected to rent by 2021. Therefore, it increasingly makes sense to identify the investment opportunities with the best potential and then to enhance this through effective tenant management, services and solutions.

I for one certainly believe that technology and AI systems will be at the heart of ensuring both better experiences for tenants, and better returns for investors.

*Elisabeth Kohlbach is founder and CEO of Skwire